* =
[-1] it also follows that the Phillipscurves are just horizontal translations of the f[u], and one can see the values of 2, respectively 5, for the assumed wage inflations at the CWIRU’s.
The cases (a) and (b) in Figure 24 reflect the developments in the OECD in the 1950-2005 period. Case (a) gives the situation somewhat like the 1950s. The trade-off of inflation and unemployment then took place at low rates along the long drawn line. The trade-off of wage (price) acceleration and unemployment gives the CWIRU. At that point price acceleration is zero, and inflation remains at a low and constant value. Case (b) gives the situation of stagflation, where both the CWIRU and the trade-off-process around it have worsened. The move from (a) to (b) can be called ‘stagflationary’. In the 1960s and 1970s authorities targetted for low unemployment at the cost of rising and eventually high inflation. In the 1980s and 1990s the authorities targetted against inflation and accepted high unemployment.
The short term Phillipscurve concerns the direct trade-off of unemployment and (wage) inflation and is given by the long drawn curves. This trade-off has only limited explanatory value. Nowadays unemployment is concentrated at the low income section of the income distribution, and it is not likely that this can be battled with high wage inflation. This phenomenon is rather explained by the shift of the CWIRU or the long run relationships between equilibrium unemployment and wage acceleration, which are given in the left diagram.
It is useful to note:
· The CWIRU need not be constant. It could be if e.g. the relation indeed is linear and if the coefficients are fixed. But neither need be the case. The CWIRU in all likelihood is itself a variable that traces out a path. (Which is another reason why the name ‘natural rate’ is unfortunate.)
· There is a movement of the curve and a movement along the curve.
· The movement of the curve is not determined by the labour market alone. Policy makers may neglect labour market measures, and may opt for high inflation (1970s) or for high interest rates (1980/90s) to fight minimum wage unemployment that is not affected by these.